How does China manage the yuan

The US government’s decision to label China a currency manipulator after Beijing allowed the yuan to weaken the 7-per-dollar symbolic level has raised questions about how well the currency and its real value are managed.

HOW CAN CHINA Yuan?

This midpoint is based on the yuan’s movement in the previous session and moves into the currencies of China’s main trading partners. The People’s Bank of China allows the yuan to trade at a 2% range around an average spot that adjusts against the dollar daily.

It has sometimes used an undefined “counter-cyclical factor” to fix the midpoint and contain potentially large oscillations in sentiment.

China also maintains heavy capital controls, stringent foreign investment quotas, and a complex system that manages offshore trading and impacts yuan offshore activity.

It has appreciated more than 17% since its revaluation in 2005. Global financial markets tend to focus on the yuan’s exchange rate in the US dollar, and have in fact been linked to the greening effect for several years.

This week, it reached a record low of 7.1397. Since the US-China trade war began in April 2018, when Washington unveiled the first tariffs on some Chinese imports, the offshore yuan has fallen 11% against the dollar.

Since 2008, the yuan has risen 3.7% against the dollar and jumped 35% against the euro, but fell 13% against the yen.

HOW HAVE THE LIMITED SIGNS PRESENT IN THE FIRST YEARS? At the end of 2015, China unveiled a new weighted CFETS yuan trade index, saying that the yuan’s value should better reflect its trade and investment with multiple countries, not just the United States. From 2017.

Many analysts suspect that Beijing is happy with the CFETS index which fluctuates between 92 and 98, which makes the currency not too weak against its partners. This week, the CFETS index fell below 92 to the lowest level on record.

The number of coins in the basket is 24 and the dollar weight is 22.4%. Analysts say keeping the CFETS index in the range will ensure that China is not disadvantaged in exchange rates against its trading partners.

The central bank of China rarely intervenes directly in foreign exchange markets, but usually operates through state-owned banks, in addition to using its money market operations and its large foreign exchange reserves.

It is also believed to affect offshore markets in a variety of ways, including planned sales and off-cycle yuan currency bills in Hong Kong.

Previously, China burned through $ 1 trillion in foreign reserves to counter expectations of devaluation following a sharp one-year devaluation in 2015.

Based on the real effective exchange rate (REER), which measures the value of a currency weighted to those of its major trading partners after adjusting for inflation, the yuan is near if not slightly stronger than its long-term average .

Monthly data show that at the end of June, Yuan’s REER was 4.9% above its 10-year average and 13.4% above its 15-year average.forex.com

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